The Morning Rant: Minimalist Edition

The Dow Jones Industrials...aren't. Most of the stocks that comprise the index are not industrial companies, and the top 10 stock measured by market capitalization are tech and retail heavy. There isn't a traditional industrial corporation until #13: Chevron, and there are only four more companies that I would consider industrials: Caterpillar (#24), Honeywell (#25), and Boeing (#26).

The index is also calculated based on stock price, so a high price but lower market capitalization would influence the index more than a low price but a higher market capitalization. And they massage the index in other ways to make it consistent across all 30 stocks.

Does it represent a broad measure of the state of the American economy?

No. It doesn't have a single small or medium sized company in the index! How can it?

A better way to track the economy, or at least the stock prices of publicly held corporations is to watch the S&P 500, which is a list of about 500 American companies weighted by market capitalization. It's not an exact list of the largest 500 companies, but its pretty close. The Magnificent Seven (i.e., Tesla, Amazon, Google, Microsoft, Nvidia, Apple and Meta) comprise over 30% of the S&P 500's market capitalization, which makes it pretty tech heavy!

And it still doesn't track small companies, which by many measures are a significant driver of employment in America. The Russell 2000 index is a measure of the bottom 2,000 companies on the Russell 3000 index, which is the 3,000 largest corporations in the country. It includes more than 95% of the publicly traded companies, so it is a pretty good snapshot of the overall economy. The Russell 2000 is about 7% of the market capitalization of the larger 3000 index, so it is a good measure of mid-cap and small-cap companies.

And the NASDAQ 100 is a very tech-heavy index that is also widely observed, but doesn't have much to do with American industrial capacty.

What's the point?

It is difficult to get a good measure of the state of public corporations with one index. They are too varied, both in size and in products. Apple corporation makes its products overseas, and sells in a particular market. Just because its stock may be doing well doesn't necessarily mean that the American economy is doing as well. And just because a few tech companies are flying high because of the demand for certain technology that drive Artificial Intelligence (AI) doesn't mean that the economy is doing as well.

So a more accurate picture of the state of the financial markets should include more than one index. And there are others besides the ones I have mentioned. And because these indexes are plain numbers, it is important that the percentage change is taken into account, rather than the raw change.

October 19th, 1987 saw the Dow drop by 508 points. That doesn't sound so bad, but it was 22.6%... the greatest one-day drop in history. The worst day last week isn't even in the top 20 worst days in history.

I'm not trying to paint a rosy picture of the economy, because the shift toward a tariff-driven trade policy is going to have its downsides, which will be reflected in the stock markets, hopefully just in the short term. It will also have significant upsides in American employment, international trade, and a more rational approach to the national security needs of raw materials and manufactured products.

The problem with our ignorant, biased, and lazy media is that they report the most shocking data, and don't bother with seemingly simple things like percentages vs. raw numbers, historical context, or the difference between the Russell 2000 and the Dow! Why? Well, they are "journalists," which is a placeholder for "mis-educated, innumerate, lazy leftists."

Anyone care to bet that 50% of the "journalists who have confidently pontificated about the financial markets the last several days can't tell you what the Russell 2000 is (it's a sucker bet)?

[Crossposted at CutJibNewsletter and X/Twitter] And the Apple and Spotify feeds for CJN's podcast should be working!

posted by CBD at 11:00 AM

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